Tag Archives: bail-out

FINANCIAL CHAOS AROUND THE WORLD

Euro crisis

Wednesday was quite a day on financial markets around the globe.

China’s stock market continued to lose considerable value, down about a third in three weeks.   Uncertainty over the future of Greece within the euro rocked European stock exchanges. And a technical glitch caused problems on the New York Stork Exchange, the world’s biggest.

The latter was resolved before the closing bell.   Greece should be resolved by the weekend.   China, the number two economic power, poses the greatest threat to the world’s economy.   There are increasing fears that the Chinese stock markets are one big giant ponzi scheme, with nothing tangible to support them.

Late Thursday Greece handed over proposals to its European partners that will, hopefully, end the crisis affecting the beleaguered country.

Greece was a member of the euro from the very beginning, using the new European banknotes and coinage from day one on January 1st, 2002.   Today, the euro is used by nineteen European countries. Euro notes are used daily by more people than the US dollar.  The two currencies are the two most important currencies in the world and are used as payment for most international trading.

When Greece joined the euro, it was suddenly able to borrow vast amounts of money, which it did. It was not all used wisely.   Following the crash of 2008, the country soon found itself unable to repay its loans. The dream currency had become a nightmare for the Greek people. Austerity was forced on the country by European bankers, making life very difficult for the average citizen.   Austerity led the country into a downward spiral, which has recently been speeding up.

In January, the left-wing Syriza party won the election, promising an end to austerity.    However, European bankers, anxious to get their money back, want to impose greater austerity as a condition for offering Greece more help.   Without help, Greece will not be able to stay in the euro.

Without a doubt, Greek governments have been reckless.   Government employees can retire at 48 on generous pensions. Corruption is rife, as also is tax avoidance.

Germany is owed 68 billion euros by Greece, France 65 billion (add 10% to get the US dollar equivalent).   Other countries have loaned lesser amounts.   Total Greek debt amounts to 323 billion euros.   Greece is asking for a further bailout of 53.5 billion.

Although there is much talk of the Greek crisis, in a sense this is not about Greece, so much as Germany.   Germany’s conservative government is taking a hard line, refusing to cancel debt or extend further loans.   The Germans want their money back, on time.   Germany’s stance is setting a precedent that will no doubt be repeated if any other country in the eurozone gets into trouble.   Many have pointed out that when Germany was suffering economically after World War II, European finance ministers, including the Greek finance minister, generously cut Germany’s debt by 50%.   If Germany would reciprocate now, Greece would be fine.

The Greek people voted in a referendum a few days ago, rejecting the austerity demands placed on them by Germany and others. However, they still want to remain in the eurozone, which is an apparent contradiction.   If they leave the eurozone, they could restore their former currency, the drachma, but this would cut them off from many of the benefits of the eurozone.   Business loans and mortgages in euros would have to be paid back in ever depreciating drachmas, leading to many foreclosures.  Importers would have to pay upfront in euros, which may be hard to get if Greece leaves the eurozone.

Nobody wants a “Grexit” (a Greek exit from the euro), but it may not be possible to avoid it if the Greeks are unwilling to make the necessary structural changes to keep them in the euro.

This crisis is not the only crisis facing Europe at this time.   The continent is having to work through a number of challenges all at once.

The migrant crisis is the second biggest issue confronting the European Union.   So many people are fleeing from the Middle East and Africa into Europe that social cohesion is becoming a serious issue.   One consequence of this massive movement of people is the rise of right-wing parties opposed to immigration.

Ukraine is a third challenge for Europe.   Russia’s invasion of parts of Ukraine threatens the peace of Europe.

The possibility of Britain leaving the EU comes in at number four.

There’s even a fifth challenge, and that’s the relationship between European countries and the United States.   France and Germany are both upset over the American NSA spying on them and their leaders, even though it’s quite likely they are doing the same to America.

Depending on how each of these issues is resolved, Europe could be very different in the near future.

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STATE OF THE UNION NOT SO GOOD

State of the Union

President Obama’s State of the Union speech, given before Congress late Tuesday, took me back fifty years.

In October 1964, the British people voted into power a Labour (socialist) government after thirteen years of Conservative rule.

Obama’s promises last night reminded me of the Labour government’s agenda.

The theme running through both was this:   government will take care of you, government will provide everything.

Except for a vague tax on the wealthy, nothing was really said about how all these programs will be paid for.

Most people are aware that the wealthy can afford expensive tax accountants who help them to reduce their tax obligations, sometimes down to zero.   Nothing is going to change that.   The president and members of Congress are not about to become paupers because of new taxes – they will find a way around them, just as other wealthy people will do.

Mr. Obama promised more help for the middle class.   The term “middle class” has a different meaning in the US to what it means elsewhere, as Sky News pointed out the following day.   The middle class in the US is mostly working class people who own their own homes and have been struggling to make ends meet for quite some time.   The biggest challenges they face are rising health care costs and falling wages and unemployment.   It’s difficult to see how taxing the rich will help them.

But the promises do provide for a massive expansion of government, which will only add to the burdens of the middle class.

A few days ago, I saw, also on Sky News, a massive fire burning in South Oxfordshire in the UK.   An extensive building was on fire, the result of arson.   The person covering the fire explained that 440 people worked in this building, which served the community in various ways, including housing.   That’s 440 jobs that did not exist seventy years ago – 440 jobs to serve a relatively small number of people in the southern part of one county!

This is what the US is headed for – bigger government programs mean bigger government buildings and bigger (higher) taxes.   If history is any guide, that tax burden will fall mainly on the middle class, the ordinary people who cannot afford expensive accountants to take advantage of the inevitable loopholes.

Government is always expanding.   Here in Michigan, there is a proposal before the electorate to increase the sales tax to pay for road repair.   But it doesn’t seem that long ago that the gas tax was increased to pay for roads.   Meanwhile, the state has had to give $191 million to Detroit to help bail the city out.   An additional high figure (close to $100 million) is being allocated to build a new “Welcome Center” at the Capitol.

It never ends.

That’s exactly what God said when He warned the Israelites what would happen when they asked for a king, for a human form of government like all the other nations, choosing to reject the theocratic government He had given them.

In I Samuel 8:5, the elders of Israel asked Samuel to “make us a king to judge us like all the other nations.”  God granted them their desire, but forewarned them (v. 9) of what to expect, to “show them the behavior of the king who will reign over them.”

In a long and very descriptive passage beginning in verse 11, God showed them how the king would take more and more of their wealth to pay for what he wanted, whether it be soldiers, servants (government employees) or just spending in general.

He concludes with these words:   “And you will cry out in that day because of your king whom you have chosen for yourselves, and the Lord will not hear you in that day” (v. 18).

Of note, here is the expression “your king whom you have chosen.” This passage includes democratically elected presidents, as well as kings.

What it’s saying is that governments inevitably expand.   The more government programs we have, the more money government needs. And, as government is inherently wasteful and generally inept, the burdens on the people grow and grow.   Dissatisfaction with the state of the economy has been evident in the polls for a few years – the people are already crying out!

However, in a democracy, the people only have themselves to blame.

Fortunately, Mr. Obama, a Democrat, is unlikely to find any support for his programs in the Republican controlled Congress.   However, programs already in place continue to grow.   It’s doubtful that even a Republican Congress will be able to reverse them.

The 1964 Labor government in England was a turning point.   Three years after taking office, thanks to their profligacy, the country had to devalue its currency against the dollar.   This led to the collapse of the sterling area, made up of mostly former British colonies that traded in the British currency, a system that meant they kept most of their financial assets in London.   Twelve years later, Britain had to turn to the International Monetary Fund for a bail-out.   It wasn’t until Margaret Thatcher became Prime Minister in 1979 that the country started to turn around.

Mrs. Thatcher believed in sound money, otherwise known as living within your means.   There was no evidence of that Tuesday night when the President addressed the nation in his annual State of the Union address.